Succession Planning 8 Key Tax Considerations You Should Take Into Account

Property succession should be viewed as a series of connected legal and tax events, rather than as a single transfer that takes place when the owner dies. While inheritance is generally tax-neutral, factors such as the nature of the property, when ownership actually vests, how the estate is administered, how ownership rights are divided and whether the property is later sold can significantly affect who is liable to pay tax and how much.Families should therefore establish the legal ownership and tax treatment of the property before carrying out any partition, relinquishment, trust arrangement or sale.Here are 8 of the key tax issues to consider:Tax compliance following the owner’s death: Income earned up to the date of death must be reported on behalf of the deceased by the legal representative. In accordance with Section 302 of the Income-tax Act, 2025, (corresponding to Section 159 of the Income-tax Act, 1961), the legal representative is also responsible for addressing the deceased’s outstanding tax liabilities, generally to the extent of the estate inherited.Income earned during administration of the estate: Rent, interest or other income arising after death but before the estate is completely distributed may be taxable in the hands of the executor or administrator under Section 312 of the Income-tax Act 2025, (corresponding to Section 168 of the Income-Tax Act 1961). After distribution, the respective heirs must report the income according to their ownership shares.Individual property versus HUF property: The tax treatment depends upon whether the property belonged personally to the deceased or formed part of a Hindu Undivided Family. An ancestral property is not automatically treated as HUF property for income-tax purposes. The manner of acquisition, treatment in earlier tax returns and existence of a common family fund are relevant in identifying the correct owner and taxpayer.Partition of HUF property: Distribution of capital assets on the partition of an HUF is generally not regarded as a transfer under Section 70(1)(a) of the Income Tax Act 2025 (corresponding to section 47(i) of the Income Tax Act 1961). However, a partial partition is not recognised for income-tax assessment, and the HUF may continue to be assessed as if such partition had not occurred under Section 315(8) of the Income Tax Act 2025 (corresponding to section 171(9) of the Income Tax Act 1961).Taxation of co-owners: Where the heirs’ shares are definite and ascertainable, each heir is generally taxed separately on his or her share of the rental income and capital gains. Deposit of the entire income or sale consideration into one heir’s bank account does not necessarily make that heir the sole taxpayer. This may result in mismatch in records such as Form 26AS, Annual Information Statement (AIS), Tax Information Statement (TIS) etc.Absence of historical cost records: Families may not possess the original purchase deed, improvement invoices or evidence of the previous owner’s acquisition cost. Since the heir generally adopts the previous owner’s cost under Section 73 of the Income-tax Act 2025, (corresponding to Section 49 of the Income-tax Act 1961), maintaining these records is essential for correctly computing capital gains. As aforementioned, for property acquired before April 1 , 2001, the prescribed fair market value as on that date may be adopted. In the case of land or building or both, such fair market value cannot exceed the stamp duty value of the property as on April 1, 2001.TDS and residential-status issues: In a sale involving multiple heirs, tax should be deducted and reported against the PAN of each seller. The threshold under Section 393 of the Income-tax Act 2025 (corresponding to 194-IA of Income-tax Act 1961) is applied with reference to the aggregate value of the property transaction. Separate withholding requirements apply where any heir is a non-resident.Past tax liabilities do not disappear on death: Outstanding tax proceedings or liabilities of the deceased may continue against the legal representative. Such liability is generally restricted to the extent that the estate can meet it; however, personal exposure may arise where estate assets are disposed of before outstanding tax obligations are addressed.